WRAPUP 4-Bank of Japan in boldest attempt yet to revive economy

* BOJ pledges open-ended asset buying from 2014
* BOJ agrees to 2 pct inflation target in statement
* Joint statement pledges bold easing, economic reforms
* Abe says BOJ decision "epoch making"
* BOJ steps fail to impress markets
By Leika Kihara and Tetsushi Kajimoto
TOKYO, Jan 22 The Bank of Japan announced on
Tuesday its most determined effort yet to end years of economic
stagnation, saying it would switch to an open-ended commitment
to buying assets next year and double its inflation target to 2
percent.
It issued a joint statement with the government promising to
reach the inflation goal "at the earliest possible time,"
drawing praise from Prime Minister Shinzo Abe, who has piled
relentless pressure on the central bank to take bolder measures
to pull Japan out of deflation.
The decision to adopt asset buying with no end date had
exceeded market expectations, analysts said. But Tokyo stocks
fell and, after an initial selloff, the yen rose on
investor disappointment that the expanded stimulus would not
start until 2014. Five-year bond yields initially fell to a
record low on the news, but then reversed direction.
"They've gone further than I thought by introducing the
open-ended plan," said Joseph Capurso, currency strategist at
Commonwealth Bank of Australia in Sydney.
"What surprises me is they won't start until 2014. That's
very odd and different from what the Federal Reserve did, which
was immediate," he said.
Having slashed interest rates close to zero, the BOJ's
policy is the latest unorthodox effort by a leading central bank
to try to boost an otherwise weak recovery from the global
financial crisis and, in Japan's case, overcome more than a
decade of deflation.
Abe led his Liberal Democratic Party to a landslide victory
in December elections and his campaign for aggressive budget and
monetary stimulus had pushed the yen lower and sparked a stock
market rally on hopes a weaker currency would boost exports. He
hailed Tuesday's BOJ action as a game-changer.
"It is 'epoch-making' in a sense of bold review of monetary
policy," he told reporters.
Indeed, the government's top spokesman said he saw no need
to revise a law guaranteeing the BOJ's independence, a threat
that had been hanging over the central bank unless it adopted
bolder monetary policy.
BOJ Governor Masaaki Shirakawa said BOJ moves to ease policy
in four of the past six months had been "extraordinary", but he
repeated his warning that the government must do its part to
reinflate the world's number three economy, which has suffered
four recessions since 2000.
"Various government measures to boost Japan's
competitiveness and growth potential are equally important,"
Shirakawa told a news conference.
Under the BOJ's current programme, it has pledged to supply
101 trillion yen by the end of 2013 by buying assets and issuing
loans.
From 2014, it will switch to an open-ended commitment to buy
assets, a move many analysts thought would only come later.
It will buy 13 trillion yen ($144.77 billion) in assets each
month but accounting for redemptions, the total size of the
programme will increase by 10 trillion yen in 2014, a balance
that will be maintained beyond 2014.
"This is very good news. For once, the BOJ has been more
aggressive than the market expected," said Brian Redican, senior
economist at Macquarie in Sydney. "The government is clearly
forcing the pace of change, which is no bad thing."
Often criticised for step-by-step easing, the BOJ would be
emulating the U.S. Federal Reserve's open-ended asset purchases.
But analysts were quick to point out that unlike the Fed, the
BOJ is delaying the launch of its scheme.
The decision to adopt open-ended asset purchases was
unanimous, but doubling the inflation target proved more
controversial as two of the nine board members voted against the
idea. They argued it was too high compared with what was deemed
sustainable in Japan.
Japan has achieved 2 percent inflation in only a handful of
months since the late 1990s.
The dissenters, Takehiro Sato and Takahide Kiuchi, also
argued government efforts to boost Japan's growth potential must
come first -- a surprise given they were among the board members
most willing to try new steps in expanding stimulus.
The split, which comes ahead of a BOJ leadership change,
underscores the challenges that lie ahead as the central bank
attempts to revive the economy and live up to market
expectations with its depleted policy arsenal.
MORE ACTION EXPECTED
Many analysts expect Abe to pressure the central bank to
ease policy further, at least in the run up to an upper house
election expected in July.
Options include scrapping the 0.1 percent floor the BOJ sets
for short-term interest rates to try to encourage more lending
and the central bank buying longer-duration bonds.
Shirakawa has ruled out abolishing the rate floor, a
position he repeated on Tuesday. He argues doing so would
discourage commercial banks from lending to each other and
distort proper market functions.
Other board members do not share his concerns and with
Shirakawa's term expiring in just over two months, markets see
it as a likely next step.
"There's still a lot of work to do, and still a lot of room
for improvement," said Tadashi Matsukawa, head of fixed income
at Pinebridge Investments in Tokyo.
In addition to the BOJ measures, the cabinet this month
approved $117 billion of spending in Japan's biggest stimulus
since the global financial crisis.
But many economists have warned the measures will provide
only a temporary boost for Japan unless the government follows
through with politically more difficult economic reforms such as
deregulating its protected farming sector.
The push to reflate the economy could also backfire if Abe
fails to convince markets that it has a credible plan to get
Japan's ballooning debt back under control.
Seeking to address such concerns, the government said in the
joint statement it would draw up a growth strategy and pursue
structural reforms to help Japan escape deflation and it pledged
to maintain fiscal discipline.
In a sobering reminder that Japan still faced an uphill
battle in pulling out of deflation, the BOJ's updated economic
forecasts showed core consumer prices, which exclude volatile
fresh food prices, inching down in the current fiscal year and
up only 0.9 percent in the year ending in March 2015.
"So when will they meet their inflation target of 2
percent?" asked Capurso of Commonwealth Bank of Australia.

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